Sector Update

March 2, 2016

Banking

Sector View
Underperform

Relaxing capital norms provide some breather

Capital position as on Q3FY16 (Reported)
Banks
Dena Bank
United Bank (I)
IOB
Syndicate Bank
Allahabad Bank
Central Bank
Union Bank (I)
Vijaya Bank
Bank of India
Oriental Bank
Corporation Bank
Punjab Natl.Bank
UCO Bank
Bank of Maha
Canara Bank
IDBI Bank
South Ind.Bank
Bank of Baroda
St Bk of India
Karnataka Bank
Indian Bank
Axis Bank
Yes Bank
J & K Bank
ICICI Bank
Karur Vysya Bank
ING Vysya Bank
DCB Bank
HDFC Bank
Federal Bank
Kotak Mah. Bank
City Union Bank
IndusInd Bank

Total CAR
10.2
10
9.7
11
10.4
10
10.3
11
11.3
11
11.5
11
11.6
12
11.5
13
11.7
12
12.5
12
12.8
14
14.9
12
15.8
13
14.0
13
15.9
14
15.2
15
16.4

Tier I Capital
7.1
7.1
7.2
7.3
7.4
7.6
7.7
7.8
7.9
8.2
8.3
8.5
8.7
8.7
8.7
8.7
9.4
9.6
9.6
10.0
10.6
10.8
10.9
11.2
11.8
12.0
12.3
12.3
13.2
13.7
14.1
14.2
15.6

Research Analyst
Kajal Gandhi
kajal.gandhi@icicisecurities.com
Vasant Lohiya
vasant.lohiya@icicisecurities.com
Vishal Narnolia
vishal.narnolia@icicisecurities.com

ICICI Securities Ltd | Retail Equity Research

The RBI has provided the much sought after relief on capital for the
banking sector, reeling under NPA pressure. Post factoring in budgetary
allocation by the government that is relatively lower at | 25000 crore for
FY17, the RBI has come out with amendments to include in Tier I, the
revaluation reserve (@55% discount), foreign currency translation reserve
(@25% discount) and DTA (capped @ 10% of CET I). The review was
carried out with a view to further aligning the definition of regulatory
capital with the internationally adopted Basel III capital standards, issued
by the Basel Committee on Banking Supervision (BCBS). The
amendments are applicable with immediate effect.
We have tried to assess the impact of these revisions in banks CRAR...
Revaluation Reserve (RR) at industry level in banks balance sheet is
~| 31000-35000 crore as on FY15 (SBI and other large private banks
have no revaluation reserve yet). Addition of 45% of RR has been
allowed to be added in CET 1 coming to ~| 15000 crore. Though the
same is just a shift from Tier II capital to Tier I for banks, it provides
significant relief as it has now substituted the equity portion and
averted large dilution for banks needed to raise equity capital. Also,
the RR is available with only few banks and the current RBI move may
prompt many other banks to get their fixed assets revalued soon
(mainly building and land) and take advantage of the same to boost
CET 1. SBI has no revaluation reserve yet in B/S and is expected to
generate revaluation reserve of |~20000 crore as per news. It
indicated at ~100 bps addition to Tier I from all 3 options. On broad
calculation, banks can see a 1080 bps increase in Tier I due to RR.
Banks like Canara Bank, Indian Bank, BoB, Dena Bank to benefit more.
In case of foreign currency translation reserve (FCTR) allowed to be
added at @25% discount to Tier I, banks like BoB, BoI, SBI, Axis and
other large private banks which have foreign operations and
exposures can see 10 to 25 bps addition to Tier I capital. Total FCTR is
at ~| 13000-15000 crore for the sector. As this is a completely new
introduction to Tier I capital calculation, it adds capital without dilution
Also, DTA has been arising for banks in case of losses, larger
provisions, asset sales, etc. The value is similar to FCTR. However,
allowing the same in case an added advantage. Smaller PSU Banks like
Dena, Union, Uco Bank, IDBI and large private banks like Axis, HDFC
Bank can see higher addition in Tier I due to the same.
Overall, banks will benefit significantly as current addition to Tier I without
equity dilution is a boon in the current stressed environment & provides
headroom to take NPA provisions in P/L making B/S stronger. If we add
this Tier I based RR in BV calculation, banks can see 2-18% hypothetical
increase in BV also. IOB, BoI and Canara Bank see large delta.
Currently, banks have CRAR of 12.7% as on September 2015. PSU banks
like BoI, Dena, Syndicate, Allahabad, IOB, Indian Bank with sub 8% Tier I
can see huge relief from dilution concerns to meet immediate Tier I
requirements. We believe that on a sum total basis, apart from smaller
banks, BoB, Canara and IDBI can see addition of ~100bps to Tier I. Private
banks like Axis, HDFC Bank and Indusind to see addition, led by DTA.
Benefit ranges from 10 bps to 110 bps. We, however, continue to remain
cautious on the sector as the said capital relief does not change the
business slowdown and stress situation that banks are currently facing.

Exhibit 1: RBI dispensation can lead to increase in Tier I ratio

Banks (FY15)

Exisitng Tier
I ratio (%)

Increase in Tier I ratio due to

Revaluation
reserve
(bps)

CalculatedT
otal impact
Forex
Reserves
on Tier 1
(bps) DTA (bps)
(bps)

Revised Tier Variation in

I ratio (%) ABV (%) if
45%
revaluation
reserve
included

Dena Bank

7.7

41

79

119

8.9

9.4

Bank of Baroda

9.9

43

37

26

105

10.9

6.0

Canara Bank

8.0

71

23

98

9.0

13.7

Bank of India

8.2

44

29

77

8.9

11.1

Union Bank (I)

7.5

25

44

71

8.2

5.6

Axis Bank

12.1

56

59

12.7

0.0

UCO Bank

9.1

21

21

54

97

10.0

4.9

11.2

20

33

52

11.7

1.8

9.3

15

35

51

9.8

2.8
0.0

IndusInd Bank
Punjab Natl.Bank
HDFC Bank

13.7

48

48

14.1

Yes Bank

11.5

34

34

11.8

0.0

9.6

31

34

9.9

0.0

St Bk of India *
Andhra Bank
Kotak Mah. Bank
Lak. Vilas Bank

8.0

26

26

8.2

5.7

16.2

16.3

0.0

9.3

20

54

75

10.1

3.0

Karur Vysya Bank

13.6

15

15

13.7

0.0

Federal Bank

14.8

50

50

15.3

0.0

Oriental Bank

8.7

17

17

8.9

3.4

IDBI Bank

8.2

32

98

130

9.5

4.5

Corporation Bank

8.1

33

33

8.4

0.0

Central Bank

8.1

40

26

66

8.7

9.2

Bank of Maha

8.8

48

29

77

9.5

15.6

Syndicate Bank

7.8

21

23

8.1

5.0

Allahabad Bank

7.7

26

33

63

8.3

6.6

Karnataka Bank

10.5

52

52

11.0

0.0

IOB

7.3

41

29

19

89

8.2

18.6

Vijaya Bank

8.2

11

15

26

8.5

2.5
10.9

Indian Bank

10.6

82

15

97

11.6

South Ind.Bank

10.4

15

44

59

11.0

2.0

DCB Bank

14.2

20

25

45

14.7

1.6

* SBI has not yet revalued, expected revaluation of |20000 crore possible, and 45% of same can add 55 bps in
Tier I taking total addition to 90 bps

Source: Company, ICICIdirect.com Research * All prices are Ex-showroom Delhi, Google.com

Salient features of announcement

Budget 2016 maintained the amount of capital infusion in PSU banks for
FY17E at | 25000 crore maintaining what was announced earlier under
Indradhanush plan and was lower-than-expected. Hence, RBI yesterday
provided some breather to banks on the capital front, especially PSU
banks. It made some amendments to the treatment of certain balance
sheet items for purposes of determining banks regulatory capital. This
review was carried out with a view to further aligning the definition of
regulatory capital with internationally adopted Basel III capital standards,
issued by the Basel Committee on Banking Supervision (BCBS).
Major amendments are:
Revaluation reserves (only 45% of the total) arising from change in the
book value of a banks property on its revaluation would be considered as
common equity tier 1 capital (CET1) instead of Tier 2 capital.

ICICI Securities Ltd | Retail Equity Research

Page 2

 Foreign currency translation reserves (only 75% of the total) arising due
to translation of financial statements of a banks foreign operations to the
reporting currency can be considered as CET1 capital.
Deferred tax assets (DTA) arising due to timing differences can be
recognised as CET1 capital up to 10% of a banks CET1 capital.
Further details as regards treatment of revaluation reserves:
Reckoning 45% of the revaluation reserves as CET 1 capital instead of
Tier 2 capital is subject to meeting the following conditions:
Bank is able to sell the property readily and there is no legal
impediment in selling
Revaluations are realistic, in accordance with Indian Accounting
Standards
Valuations are obtained, from two independent valuers, at least once
every three years;
Where the value of the property has been substantially impaired by any
event, these are to be immediately revalued and appropriately factored
into capital adequacy computations

ICICI Securities Ltd | Retail Equity Research

Page 3

ICICIdirect.com coverage universe (BFSI)

Sector / Company
Bank of Baroda (BANBAR)
Punjab National Bank (PUNBAN)
State Bank of India (STABAN)
Indian Bank (INDIBA)
Axis Bank (AXIBAN)
City Union Bank (CITUNI)
DCB Bank (DCB)
Federal Bank (FEDBAN)
HDFC Bank (HDFBAN)
IndusInd Bank (INDBA)
Jammu & Kashmir Bk(JAMKAS)
Kotak Mahindra Bank (KOTMAH)
Yes Bank (YESBAN)

CMP
(|)
147
78
177
84
410
89
76
50
1,008
891
65
655
752

TP(|)
123
74
160
91
440
90
72
45
1,170
1,000
70
677
750

Rating
Hold
Hold
Hold
Hold
Hold
Buy
Hold
Sell
Buy
Hold
Hold
Hold
Hold

EPS (|)
P/E (x)
M Cap
(| Cr) FY15 FY16E FY17E FY15 FY16E FY17E
33,987
15
-8
11
9.6 -18.2 12.9
15,218
17
6
14
4.7 12.9
5.6
131,919
18
13
16 10.1 13.2 11.1
3,605
21
15
19
4.0
5.7
4.4
97,246
31
35
39 13.2 11.7 10.5
5,294
6
7
8 13.7 12.0 10.9
1,976
7
6
7 11.2 12.0 10.9
8,530
6
4
5
8.4 12.4 10.1
252,038
41
49
60 24.7 20.5 16.7
51,916
34
39
50 26.3 22.8 17.9
3,146
10
13
17
6.2
5.1
3.8
119,819
14
12
14 48.0 56.1 46.0
31,522
48
60
69 15.7 12.5 10.8

P/ABV (x)
RoA (%)
RoE (%)
FY15 FY16E FY17E FY15 FY16E FY17E FY15 FY16E FY17E
1.1
2.4
2.0 0.5 -0.3 0.3
9
-5
7
0.7
1.1
0.8 0.5 0.2 0.4
8
3
6
1.3
1.4
1.3 0.7 0.5 0.5
11
8
8
0.4
0.4
0.4 0.5 0.4 0.4
7
5
6
2.2
2.0
1.7 1.7 1.7 1.6
18
17
16
2.1
1.9
1.7 1.4 1.5 1.5
16
15
15
1.5
1.4
1.2 1.3 1.0 1.0
15
11
11
1.1
1.2
1.1 1.3 0.8 0.8
14
9
10
4.2
3.5
3.0 1.9 1.9 1.9
19
18
19
4.5
3.0
2.7 1.8 1.9 2.0
18
16
16
0.7
0.6
0.6 0.7 0.8 1.0
9
10
12
5.7
5.3
4.8 1.5 1.1 1.2
12
9
10
2.7
2.3
2.0 1.6 1.7 1.6
21
20
19

Source: Company, ICICIdirect.com Research

ICICI Securities Ltd | Retail Equity Research

Page 4

RATING RATIONALE

ICICIdirect.com endeavours to provide objective opinions and recommendations. ICICIdirect.com assigns

ratings to its stocks according to their notional target price vs. current market price and then categorises them
as Strong Buy, Buy, Hold and Sell. The performance horizon is two years unless specified and the notional
target price is defined as the analysts' valuation for a stock.
Strong Buy: >15%/20% for large caps/midcaps, respectively, with high conviction;
Buy: >10%/15% for large caps/midcaps, respectively;
Hold: Up to +/-10%;
Sell: -10% or more;

Pankaj Pandey

Head Research

pankaj.pandey@icicisecurities.com

ICICIdirect.com Research Desk,

ICICI Securities Limited,
1st Floor, Akruti Trade Centre,
Road No 7, MIDC,
Andheri (East)
Mumbai 400 093
research@icicidirect.com

ICICI Securities Ltd | Retail Equity Research

Page 5

ANALYST CERTIFICATION
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report accurately reflect our views about the subject issuer(s) or securities. We also certify that no part of our compensation was, is, or will be directly or indirectly related to the specific recommendation(s)
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